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Off-Farm Income, Production Decisions, and Farm Economic Performance
Jorge Fernandez-Cornejo
Economic Research Report No. (ERR-36), February 2007
U.S. farmers must make a host of decisions relating to their
farms’ operation, including what to grow, when to grow
it, in what quantities, and by what methods. Often overlooked
in this calculation, but factoring heavily in the diversity
of U.S. farms and farm households, is the fact that most operators
split their time between farm and nonfarm activities. Large
farms are typically able to economize on inputs and better coordinate
stages of production. Smaller farms, though often unprofitable
from a farm business perspective, have persevered by being part
of household enterprises that combine farm and off-farm activities.
Their operators’ onfarm decisions, from choice of technology
to choice of specialty, are often influenced by off-farm commitments
and income. And when viewed from a broader perspective, many
small farm households’ efficiency would be envied by the
operator of even the largest farm.
What Is the Issue?
Onfarm and off-farm activities compete for limited managerial
time (mainly of the operator and spouse). How farm operator
households allocate their time largely affects production decisions
(such as technology adoption), economic performance, and the
household's economic well being. The extent of off-farm work
and its relationship with farm economic performance have many
policy implications. For example, government support of agriculture
(via conservation, research and development, extension, and
commodity programs) may affect farm households differently depending
on the relative importance of onfarm versus off-farm income.
And policies promoting adoption of farm technologies, to be
most effective, must account for different demands on managerial
time and the relative ability of the farm household to accommodate
those demands.
What Did the Study Find?
Off-farm employment and income vary inversely with
farm size. In 2004, farm households with farm sales
less than $10,000 had average off-farm earned income of $54,600,
while households with farm sales between $500,000 and $1 million
averaged only $30,100. The largest source of variation is the
off-farm income earned by operators; off-farm income obtained
by spouses is rather stable across farm sizes. Operators of
smaller farms typically participated more in off-farm employment,
worked more hours off the farm, and had a higher off-farm income
than those of larger farms.
Farmers have an economic incentive to increase farm size only
if the gain in output can be had with a less than proportionate
increase in inputs. Operators of smaller farms (annual sales
below $100,000) are estimated to need an increase of 5 percent
in all inputs to support a 10-percent increase in all farm outputs,
while larger farms (sales above $500,000) require an estimated
8-percent increase in inputs to achieve the same increase in
outputs. This means smaller farmers have a greater incentive
to expand. However, a household perspective (including off-farm
income activities) reduces the inclination for small farmers
to up their farm size. Including off-farm income-generating
activities improves the overall economic performance of the
household. More importantly, the relative improvement
is greater for smaller farms than for larger farms. Thus, households
operating smaller farms may compensate for the scale disadvantages
of their farm business by integrating farm and off-farm activities.
Our estimates for corn and soybean farms show that households
engaged in off-farm income-generating activities together with
the production of traditional farm outputs have cost savings
of 24 percent relative to carrying out those activities separately.
Off-farm income affects how we view technical efficiency (how
well a farm transforms inputs into outputs given the technology
at its disposal). Farm-level efficiency increases with farm
size, but such a one-sided perspective is misleading because
off-farm income is increasingly important to farm households
as an output. When off-farm activities are included, household-level
efficiencies are higher than farm-level efficiencies across
all farm sizes, but efficiency gains from
integrating off-farm work into the output portfolio are greater
for smaller farms. As a result, household-level efficiencies
of smaller farms are comparable to farm-level efficiencies of
larger farms. This suggests that households operating small
farms have partially adapted to shortfalls in farm-level performance
by increasing their off-farm income.
The adoption of management-saving technologies (e.g.,
herbicide-tolerant crops, conservation tillage) is significantly
related to higher off-farm household income. While
household income from onfarm sources is not significantly associated
with adoption of these technologies, total household income
does have a significantly positive association with such adoption.
On the other hand, managerially intensive technologies (such
as precision farming) are associated with significantly lower
off-farm income. These findings corroborate a tradeoff betweenhousehold/operator
time spent in onfarm and off-farm activities. Households operating
small farms, which lack economies of scale, devote more time
to off-farm opportunities and are more likely to adopt management-saving
technologies.
How Was the Study Conducted?
To examine the relationships between off-farm income, farm
and household characteristics, and economic performance of U.S.
farm households, we developed several econometric models and
estimated them using USDA's Agricultural Resource Management
Survey (ARMS) data for several years (1996-2001). To examine
the relationship between off-farm work and economic performance
of farm households (including economies of scale and scope,
and economic efficiency), we compared estimates obtained using
traditional farm-level models to estimates obtained using household-level
models (including off-farm income-generating activities along
with traditional farm outputs such as crops and livestock).
To examine the relationship between off-farm income and technology
adoption, we developed a model that incorporates the adoption
decision into the agricultural household framework. We examined
the interaction of off-farm work and adoption of agricultural
technologies of varying managerial intensity, including herbicide-tolerant
crops, precision agriculture, conservation tillage, and Bt corn,
after controlling for other factors.
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